The main features of Islamic insurance are:
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cooperative risk sharing by using charitable donations to eliminate gharar and riba;
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clear financial segregation between the participant (insured) and the operator (insurance company);
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shariah-compliant underwriting policies and investment strategies.
Cooperative Risk Sharing
The characteristics of a cooperative include self-responsibility, democracy, equality, equity, solidarity, honesty, openness, social responsibility, and caring for others. While mutuality or cooperative risk sharing is at the core of Islamic insurance, it cannot alone create an Islamic insurance operation. Islamic insurance is based on more than one contractual relationship: The first relationship is a mutual insurance contract between policyholders (contributors) and each other. This is similar to a pure mutual insurance relationship, taking into consideration the concept of donation (tabarru) instead of premiums and an ethical framework of Islamic transactions. The main features behind cooperative insurance are:
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Policyholders pay premiums to a cooperative fund with the intention of it being a donation to those who will suffer losses (tabarru).
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Policyholders are entitled to receive any surplus resulting from the operation of the cooperative insurance fund.
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Policyholders are liable to make up for any deficits that result from the operation of the cooperative insurance fund.
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The amount of contribution (premium) differs from one participant to another, based on the degree of risk in general insurances and actuarial principles in life assurance.
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There is no unified system to operate the treatment of surplus and deficit. There is therefore more than one model accepted by shariah scholars being used in practice.
Clear Segregation Between Participant and Operator
In conventional insurance, the insurance company is a profit-making organization that aims to maximize profit by accepting the financial burden of others’ losses. The insurance company is owned by shareholders who are entitled to receive any profit and are responsible for financing any deficit. Under Islamic insurance, the system is that the insurance company’s role is restricted to managing the portfolio and investing the insurance contributions for and on behalf of the participants. The relationship between the participants and the insurance company (as an operator, not as an insurer) is different. There are four different models in operation: The mudarabh model, the wakalah model, the hybrid mudarabh–wakalah model, and the pure cooperative model (non-profit). “The overarching goal of Takaful is brotherhood, solidarity, protection and mutual cooperation between members” (Kassar, 2008, p. 66).
Shariah-Compliant Policies and Strategies
Ethical insurers invest money in a responsible way in industries that are ethically sound and do not harm the environment or people. Islamic insurance is similar, except that the ethical considerations are extended to those which do not contravene the religion of Islam and are monitored by a shariah board, which is part of the company structure. In particular, the investment and underwriting policies need to be free of any involvement with the prohibited activities of gambling, alcohol, pork, armaments, tobacco, and interest-bearing activities, loans, and securities.